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Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(Scarborough)
Chapter 22 Management Succession and Risk Management Strategies in the Family
Business
1) The essential quality for a family business that shows a recognition that decisions should be
left to the person with the greatest talent in that area is the quality of:
A) shared power.
B) shared values.
C) tradition.
D) strong family ties.
2) Amanda and William run a retail clothing store together. Amanda is a CPA with great
financial analysis skills. William has the sense of style and strong negotiating skills. Financial
decisions are largely left to Amanda, while buying and display decisions are left to William. This
is an example of the essential quality of:
A) shared power.
B) a willingness to learn and grow.
C) tradition.
D) shared values and vision.
3) ________ is an essential quality for a successful family business but it can also become a
barrier to change. When it provides a foundation, it works well, when it restricts the future, it
becomes a barrier.
A) Shared power
B) Shared values
C) Tradition
D) Family behavior
4) The use of a formal family council with an open discussion of all ideas is a way to
demonstrate the essential quality of:
A) shared power.
B) a willingness to learn and grow.
C) shared values.
D) family behavior.
5) While it is an essential quality for a successful family business, this quality is the one that
cannot be imposed or forced. If family members refuse to embrace it, they can still be part of the
business.
A) Shared power
B) A willingness to learn and grow
C) Shared values
D) Family behavior
6) Alicia has decided to retire and sell her business. She wants to walk away from the business
and enjoy her retirement without having to think about the business. She has no children or
employees who want to buy it. Her best choice of an exit strategy is:
A) a sale for cash plus a note.
B) a leveraged buyout.
C) a straight sale.
D) an ESOP.
7) The employees of Martin's Cleaners, a small retail chain of dry cleaner stores and
laundromats, are buying the business from the owner, who is retiring. They are offering the
owner a percentage of the asking price in cash plus quarterly payments on the balance, with
payoff complete in three years. This is an example of:
A) a sale for cash plus a note.
B) a leveraged buyout.
C) a straight sale.
D) an ESOP.
8) Ted is retiring in five years and is thinking of selling the business. Ramon, his general
manager, tells him that he, the other managers, and the employees want to buy the business from
him. Ted sets up a process where all the managers and employees "buy" stock in the company
each month through payroll deductions, so that in five years the employees hold 100% of the
company. This is an example of:
A) a sale for cash plus a note.
B) a leveraged buyout.
C) a straight sale.
D) an ESOP.
9) In a(n) ________ managers and/or employees borrow money from a financial institution and
pay the owner the total agreed-upon price at closing; then they use the cash generated from the
company's operations to pay off the debt.
A) family loan
B) employee stock ownership plan (ESOP)
C) leveraged buyout (LBO)
D) sale for cash plus a note
10) While a large percentage of business founders plan to pass on their businesses, few create
management succession plans because:
A) they don't know how to do it.
B) they are reluctant to let go of the business.
C) they can't afford the attorneys' and accountants' fees.
D) they don't feel they need one because they know which child will assume management of the
business.
11) In ________ of the management succession process, the successor is allowed to rotate
through a variety of jobs to broaden the base understanding of the business as well as to have
his/her skills evaluated.
A) Stage I
B) Stage II
C) Stage III
D) Stage IV
12) A formal mentoring program should be established in ________, using both internal and
external people. As the successor develops his/her skills and performance, he/she will transition
to the next stage.
A) Stage I
B) Stage II
C) Stage III
D) Stage IV
13) In ________ of the management succession process, the successor's real decision-making
power grows rapidly. The final assessment of the individual's abilities is determined.
A) Stage I
B) Stage II
C) Stage III
D) Stage IV
14) When Marshall Paisner decided to pass his Scrub-A-Dub car wash chain on to his children,
he violated one of the cardinal rules of the transfer of power, but it worked. What he did was:
A) made a quick transition in about 30 days and walked away.
B) made both of his sons co-presidents and had them share power and the company.
C) named his youngest son to the presidency of the company but retained all final decision
control.
D) sold the company to an outsider through a cash payment of 10% and a note for 90% of the
value of the business.
15) Small business owners can make a number of mistakes in their management succession plan
including:
A) naming a successor too early.
B) having another manager in the company mentor the successor.
C) assuming his/her children want control of the business.
D) All of these
16) During the transfer of power, when the successor makes mistakes, the owner should:
A) use them as a means for teaching.
B) step in and fix them him/herself, to prevent damage to the company.
C) explain how the owner would have handled it and insist it be done that way in the future.
D) retake control of the company.
17) The most common and popular estate planning tool for small business owners is the:
A) buy/sell agreement.
B) irrevocable trust.
C) family limited partnership.
D) estate freeze.
18) A(n) ________ gives the surviving owner or heir of a family business the right to purchase
the stock of the deceased owner at a price established by a predetermined formula.
A) grantor-retained annuity trust
B) estate freeze
C) unified transfer credit
D) buy/sell agreement
19) A business founder relying on a lifetime giving strategy to minimize the taxes on the estate
she is passing on to her son can give him a maximum gift of ________ in company stock each
year, tax exempt.
A) $5,000
B) $14,000
C) $25,000
D) $100,000
20) A(n) ________ is an agreement between a grantor and a trustee where the trustee holds legal
title to property for the beneficiaries of the trust.
A) grantor-retained annuity trust
B) family limited partnership
C) trust
D) estate freeze
21) A(n) ________ attempts to minimize taxes on a family business passed from one generation
to the next by creating two classes of stock—one for the parents (preferred stock), whose value is
locked in, and another for the children (common stock), whose value reflects the market value of
the business.
A) grantor-retained annuity trust
B) estate freeze
C) trust
D) buy/sell agreement
22) In a grantor-retained annuity trust:
A) there is an attempt to minimize taxes on a family by creating two classes of stock—preferred
stock, whose value is locked in, and common stock, whose value reflects the market value of the
business.
B) a business owner can pass on up to $10,000 annually, which is exempt from federal gift taxes.
C) the grantor retains the voting power and interest income from the stock in the trust for up to
ten years.
D) the surviving owner or heir of a family business has the right to purchase the stock of the
deceased owner at a price established by a predetermined formula.
23) The ________ is a transfer of ownership strategy for an owner to transfer the company to
his/her children while retaining control over it him/herself.
A) grantor-retained annuity trust
B) family limited partnership
C) revocable trust
D) estate freeze
24) ________ allow(s) employees and/or managers (that is, the future owners) to purchase the
business gradually, which frees up enough cash to finance the venture's future growth.
A) A sale for cash plus a note
B) Leveraged buyouts (LBOs)
C) Employee stock ownership plans (ESOPs)
D) Selling to insiders
25) A small fireworks manufacturer that shuts its plant down permanently because the risk of fire
and the resulting losses are too great is relying on a risk ________ strategy.
A) avoidance
B) reduction
C) anticipation
D) transfer
26) A company that installs a sprinkler system in its corrugated box factory is using a risk
________ strategy.
A) avoidance
B) reduction
C) anticipation
D) transfer
27) A small business that puts aside a specific amount of money into a special fund each month
to cover the cost of replacing its highly specialized manufacturing equipment is using a risk
________ strategy.
A) avoidance
B) reduction
C) anticipation
D) transfer
28) A company using a risk anticipation strategy would do which of the following?
A) Buy an insurance policy to cover the risk.
B) Cease the process or function that constituted the risk.
C) Educate employees as to the risks and dangers of the problem process.
D) Set resources aside to deal with the problem when it arose.
29) A small business that buys a fire insurance policy on the equipment in its corrugated box
factory is relying on a risk ________ strategy.
A) avoidance
B) reduction
C) anticipation
D) transfer
30) A company using a risk transfer strategy would do which of the following?
A) Buy an insurance policy to cover the risk.
B) Cease the process or function that constituted the risk.
C) Educate employees as to the risks and dangers of the problem process.
D) Set resources aside to deal with the problem when it arose.
31) Insurance companies are able to assume so much risk because:
A) they are stock-based companies with deep pockets.
B) they are "gamblers" who bet they are going to make money before they have to pay off any
claims.
C) they share the risk among numerous policy holders.
D) they are backed by the government and will be "bailed out" if they get into trouble.
32) There are specific requirements for insurability which include:
A) the value of the actual loss must be possible to determine.
B) the risk cannot be selected.
C) the risk must be within a single geographical area.
D) there must a pool of insurers who will accept the risk.
33) When a risk is evaluated in terms of how much it could affect a company's ability to operate,
the risk is being assessed in terms of:
A) probability.
B) cost.
C) actuality.
D) severity.
34) A(n) ________ is a contract that co-owners often rely on to ensure the continuity of a
business.
A) irrevocable trust
B) buy/sell agreement
C) trust
D) grantor retained annuity trust (GRAT)
35) The business owner's policy (BOP) typically includes only:
A) theft and crime.
B) pensions and annuities, and health.
C) property and casualty, and liability.
D) disability and hospitalization.
36) ________ insurance is protection from loss, theft, or destruction applied to vehicles,
buildings, etc. It can be written with a broad coverage or to cover a specific item or items.
A) Life and health
B) Pensions and annuities
C) Workers' compensation
D) Property
37) When a business owner purchases protection for losses occurring when a contract is not
completed on time or is performed incorrectly, it is buying ________ insurance.
A) casualty
B) surety
C) liability
D) comprehensive
38) Life insurance differs from all other types of insurance in that:
A) it cannot be purchased by the one who benefits from the loss.
B) it does not pertain to avoiding risk.
C) it is federally insured.
D) it doesn't pay unless there is a loss.
39) In a(n) ________, managers and/or employees borrow money from a financial institution and
pay the owner the total agreed-upon price at closing; they then use the cash generated from the
company's operations to pay off the debt.
A) irrevocable trust
B) buy/sell agreement
C) LBO
D) estate freeze
40) ________ is the transfer of risk from one entity (an individual, a group, or a business) to an
insurance company.
A) Risk management
B) Trust
C) Pension and annuities
D) Insurance
41) A dentist or an attorney would buy malpractice insurance to transfer the risk of lawsuits. This
is a type of ________ insurance.
A) casualty
B) surety
C) liability
D) comprehensive
42) ________ protects against damage a business causes clients due to a mistake on their part.
A) Worker's compensation
B) Professional liability insurance
C) Surety insurance
D) Employment practices liability insurance
43) One of the fastest growing forms of insurance that protects companies against claims due to
suits on grounds of the Americans with Disabilities Act and the Medical Leave Act, etc., is:
A) worker's compensation.
B) professional liability insurance.
C) surety insurance.
D) employment practices liability insurance.
44) ________ offer(s) liability coverage that protects against losses resulting from injuries,
damage, or theft involving the use of company vehicles.
A) Worker's compensation
B) Surety insurance
C) Professional liability insurance
D) Auto insurance policies
45) Small business owners have a number of options for controlling health care costs, such as:
A) increasing policy deductibles.
B) conducting a safety audit.
C) pursuing a loss-control program.
D) decreasing the dollar amount of employee contributions.
46) The creation of a safety team, conduct of a safety audit, and creation of a safety manual are
all techniques for controlling:
A) property and casualty insurance costs.
B) professional liability insurance costs.
C) health care insurance costs.
D) worker's compensation insurance costs.
47) The most basic type of trust is the ________ trust, which allows a business owner to put
assets into a trust naming his spouse as the beneficiary upon his death.
A) irrevocable
B) grantor
C) bypass
D) ESOP
48) Jackson Fast Food restaurant lost thousands of dollars' worth of food when a freezer broke.
To cover the loss, Jackson should have:
A) liability insurance.
B) loss of business insurance.
C) machinery and equipment insurance.
D) There is no insurance for this type of loss.
49) What are the exit strategies available to entrepreneurs when it is time to step down?
A) Close the business
B) File for Chapter 7
C) Sell to outsiders
D) Force a family member to take over
